Dollar rebounds as commodity prices decline

Yuan breaks key barrier of 8 to the dollar

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar rallied across the board Monday, recovering from recent steep losses while showing a limited reaction to weaker-than-expected manufacturing and foreign-capital-inflows data.

Meanwhile, a slump in Asian equities and a drop in commodities prices also supported the dollar, said analysts. Commodity-price strength tends to hurt the dollar, since the U.S. is a net importer of oil and other commodities. See Metals Stocks.

The "euro/dollar rally may have set a top for the time being," said Boris Schlossberg, senior currency strategist at FXCM. "Having risen for five weeks in a row, the euro/dollar is due for a retrace and this week may yet see a bout of profit-taking from euro longs."

In late New York trading, the euro fell to $1.2784, down from $1.2921 late Friday. The dollar traded at 110.35 yen, up from 110.06 yen. The British pound was at $1.8773, down from $1.8941. The dollar was at 1.2124 Swiss francs, up from 1.1979 francs late Friday. See live currency prices.

The greenback had touched a more than one-year low against the euro earlier in the session after a Wall Street Journal article said that the U.S. was comfortable with a weaker dollar. The U.S. currency has hit multimonth lows against major rivals almost daily since late April.

Andy Cottrill, senior FX dealer at CMC Markets, cautioned that the dollar remains under pressure amid concern about the slowing outlook for the U.S. economy and a growing tendency for countries to shift reserves out of the greenback.

"It's certainly shaping up to be an interesting week for currency markets -- volatility looks likely but the dollar may well see further exposure on the downside." he said.

Foreign purchases fall

Capital flows into the U.S. fell to $69.8 billion in March after reaching a revised $90.5 billion in February, the Treasury Department said Monday. The decline was led by a sell-off in Treasury bonds and notes bought by official foreign institutions. Economists had expected net foreign-securities purchases to decline to around $80 billion. See full story.

It "seems like the market was too overoptimistic on foreign purchases. Higher yield is not good enough to offset the weakness of the U.S. dollar," said Kathy Lien, chief strategist at FXCM. "Large selling by the Japanese is a big red flag, since they are the largest holder" of U.S. Treasurys.

There was "minimal reaction in the dollar, however, as the number still meets the inflow need to plug the trade deficit," she said.

The nation's trade deficit narrowed to $62 billion in March, the lowest since last August, the Commerce Department said Friday.

Separately, the Empire State Manufacturing index fell to 12.4 points in May from 15.8 in April, the New York Federal Reserve Bank said. This is the lowest level since June 2005. Economists were forecasting the index to inch lower to 14.6. See full story.

Elsewhere, existing-home sales are down more than 15% in five states that have had the hottest housing markets, the National Association of Realtors said Monday.

Later in the week currency investors will scrutinize data on consumer prices, producer prices, housing starts and industrial production for more clues on U.S. economic strength and inflation pressures. See Economic Calendar.

"Rising energy prices in April are expected to feed into headline price data, with the risk of a larger-than-expected increase in core prices. If either CPI or PPI beats expectations, the market is likely to raise the odds of a June rate hike and provide some much-needed ballast for the greenback," said Michael Woolfolk, senior currency strategist at the Bank of New York. See Futures Movers.

Dollar/yuan falls below key level

Overnight, the Chinese yuan crossed the 8-to-the-dollar threshold for the first time since China revalued its currency by 2.1% in July. Since the move, the yuan has appreciated a further 1.4%.

The yuan opened at 7.9976 to the dollar on Monday morning in Shanghai trading. The People's Bank of China had set the day's official target at 7.9982. Friday's rate was 8.0082. See full story.

Last week, the U.S. Treasury Department's foreign-exchange report refrained from labeling China a "currency manipulator," despite comments from U.S. officials expressing dissatisfaction with the slow pace of exchange rate reform.

"The fact that Asian currencies have not responded to [a U.S. dollar-yuan] fixing below 8 today is not surprising as [the yuan's] fix is simply catch-up after recent [dollar] weakness vs. [the euro and yen] rather than the start of a phase of meaningful [yuan] outperformance," said analysts at ABN Amro in a note.

But Japan's yen, often viewed as a proxy for the yuan, failed to draw much support from China's currency move.

The yen was also pressured after Bank of Japan Governor Toshihiko Fukui said at a conference in Tokyo that the end of excess fund draining and ending a period of zero interest rates are completely different issues, damping speculation that the central bank will start raising rates as early as next month.

Aussie, kiwi under pressure

Currencies that are particularly linked to commodity prices, such as the Australian dollar, came under particular pressure as commodity prices declined.

The Australian dollar last traded down 1.5% at $0.7604, while the New Zealand dollar was down 1.4% at $0.6194.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.